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Tuesday, November 01, 2016

Uber Mathematics

UK Court News. Uber has lost a test case in the UK courts, in which it argued that its
drivers were self-employed and therefore not entitled to the minimum
wage or any benefits. Why is this ruling not quite as straightforward as it seems? To answer this question, we have to look at the mathematics of two-sided or multi-sided platforms.

Platforms exist in two states - growth and steady-state. A mature steady-state platform maintains a stable and sustainable balance between supply and demand. But to create a platform, you have to build both supply and demand at the same time. Innovative platforms such as Uber are oriented towards expansion and growth - recruiting new passengers and new drivers, and launching in new cities.

New Passengers

"Every week in London,
30,000 people download Uber to their phones and order a car for the
first time. The technology company, which is worth $60bn, calls this
moment “conversion”. It sets great store on the first time you use its service ...
With Uber, the feeling should be of plenty, and of assurance:
there will always be a driver when you need one." (Knight)

New Drivers

"They make it sound so simple: Sign up to drive with Uber and soon you’ll be earning an excellent supplementary income!
That’s the central message in Uber’s ongoing multi-platform marketing campaign to recruit new drivers." (McDermott)

New Cities

"Uber has deployed its ride-hailing platform in 400 cities around the
world since its launch in San Francisco on 31 May 2010, which means that
it enters a new market every five days and eight hours. ... To take
over a city, Uber flies in a small team, known as “launchers” and hires
its first local employee, whose job it is to find drivers and recruit
riders." (Knight)

But here's the problem. In order to encourage passengers to rely on the service, Uber needs a surfeit of drivers. If passengers want instant availability of drivers (plenty, assurance, there will always be a driver when you need one), then Uber has to maintain a pool of under-utilized drivers. (Knowles)

Simple mathematics tells us that if Uber takes on far more drivers than it really needs, some of them won't earn very much. Furthermore, people with little experience of this kind of work may underestimate the true costs involved, and may have an unrealistic idea of the amounts they can earn: Uber has no obvious incentive to disillusion them. (This is an example of Asymmetric Information.) Even if the average earnings of Uber drivers are well above the minimum wage, as Uber claims, it is not the average that matters here but the distribution.

The myth is that these are drivers who can choose whether to provide a service or not, so they are free agents. Libertarians wax lyrical about the "gig economy" and the benefits to passengers. However, the UK courts have judged that Uber drivers work under a series of constraints, and are therefore to be classified as "workers" for the purposes of various regulations, including minimum wage and other benefits.

Uber has announced its intention to appeal the UK judgement. But if the judgement stands, what are the implications for Uber? Firstly, Uber's overall costs are likely to increase, and Uber will undoubtedly find a way either to pass these costs onto the passengers or to pass them back to the drivers in some other form. But more interestingly, Uber now has a financial incentive to balance supply and demand more fairly, and to avoid taking on too many drivers.

Uber sometimes argues it is merely a technology company, and is not in the transportation business. Dismissing this argument, the UK courts quoted a previous judgement from the North California District Court:

"Uber does not simply sell software; it sells rides. Uber is no more a 'technology company' than Yellow Cab is a 'technology company' because it uses CB radios to dispatch taxi cabs."

However, Uber's undoubted technological know-how should enable it to develop (and monetize) appropriate technologies and algorithms to manage a two-sided platform in a more balanced way.

Update: similar concerns have been raised about Amazon delivery drivers. I have previously praised Amazon on this blog for its pioneering understanding of platforms, so let's hope that both Amazon and Uber can create platforms that are fair to drivers as well as its customers.Mr Y Aslam, Mr J Farrar and Others -V- Uber (Courts and Tribunals Judiciary, 28 October 2016)